A toll on a congested road is in essence:

• A. a method to eliminate all externalities
• B. an example of a public good
• C. a way to internalize the negative externality of congestion
• D. a subsidy to encourage more road usage

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of externalities in microeconomics. Externalities occur when a third party is affected by the actions of others, without this effect being reflected in market prices. Negative externalities impose costs on others, while positive externalities provide benefits.
2. Step 2: Recognize that congestion on a road is a classic example of a negative externality. When too many drivers use the road, each additional driver imposes delays and costs on others, which are not accounted for in the individual driver's decision to use the road.
3. Step 3: Learn that a toll is a price charged to drivers for using the congested road. This toll increases the private cost of driving, making drivers consider the external cost they impose on others.
4. Step 4: Understand that by charging a toll, the government or authority internalizes the externality. This means the external cost of congestion is reflected in the driver's cost, leading to more efficient road usage and reduced congestion.
5. Step 5: Conclude that the toll is not a subsidy (which encourages more usage), nor is it a public good (which is non-excludable and non-rivalrous). Instead, it is a mechanism to internalize the negative externality of congestion.